Think Like A Trader Blog

Tuesday, 26 April 2016

What Can Scuba Diving Teach You About Trading?

Reading Time - 4 Minutes

I have been studying for my PADI Open Water certification for the past couple of weeks. I didn’t think learning to Scuba Dive would in any way relate to trading! However, one glaring similarity I found was to do with habit formation.

We already know that emotional trading can be your worst enemy as a trader. It can take a sound trading plan, crumple it up and throw it in the bin, right next to your trading account.

So when reading the textbook provided before my scuba course, I was pleased to see a very simple explanation of the best way to avoid running out of air and dying, allowing your lungs to over expand so you… end up dying (why am I doing this again?) For me it strikes a cord for one of the main concepts of doing anything the correct way and is exactly what professionals do. I had never seen it written down in such a simple manner.

‘When in times of stress of panic, you tend to do what you are used to doing.’

As simple as that. One short sentence that sums up the reason why you need to focus on building your trading discipline as soon as you begin trading – not when you have a larger account; not when you make back that last loss; and not after you just scalp a few last points from the market.

We tend to return to well ingrained habits in times of stress or panic. Think about any professional and how they train. Repetition. And repetition of doing things a very particular way, leaving you in no doubt as to the correct way forward. Soldiers do it. Footballers do it. Public speakers do it. Surgeons do it. Fire fighters do it.

We switch to auto-pilot when the going gets tough. So our auto-pilot needs to be programmed to do the correct thing. If you allow yourself to make mistakes and jump in and out of the market at a whim, that is exactly what you’re going to keep on doing. Then, when you lose a huge portion of your account you’ll be sitting there thinking ‘why did I do that?’

So build good, solid trading habits. Give yourself every opportunity to do the correct thing when the market throws you a little drawdown.

I hope you all have a great trading week! 

Monday, 18 April 2016

How Starting With A Small Trading Account Can Actually Benefit You

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A lot of people seem put out by having to start trading with a small account. They contact me and ask how best to proceed and if they should increase their risk until they grow the account.

Now this may seem hard to believe, but starting with a small account is a much better way to begin as a trader than slapping down thousands of pounds and jumping in like Dirty Harry with all guns blazing.

I should note that this also has to be taken sensibly - If you have £1,000 to your name and that is the entirety of your savings and you need it for a family holiday later in the year, then even putting down that amount as a small account is a terrible idea. Trading money should always be money you can afford to lose, certainly until you become consistent.

So how is starting with a small account going to work in your favour?

Quite simply, it allows you to make the mistakes that all beginners make. There is no way you can learn anything new without making mistakes. They happen. You’re human (I think?) and shouldn’t beat yourself up over them. That is a LOT easier if you’re losing £10 or £20 in a trade, rather than £500 or £1000. Emotional trading is like a magnet – it attracts more of the same. And it all stems from the fear and hatred of losing money. You need to build discipline BEFORE coming face to face with it.

A small account lets you focus on your trading plan and learn how to follow it to the letter. It doesn’t matter so much if you win or lose trades when you’re winning and losing small amounts. That leaves you open to focus on what is important – doing it properly. And as that small account grows, you’re growing as a trader with it, bringing along all of the attributes required to trade well.

The broken record that is me advises you to start small, give yourself time and focus on getting it right. The rest falls into place as you go.

I hope you all have a great trading week!

Monday, 4 April 2016

When I First Became Profitable

Reading Time - 4 Minutes

I used to be a super conservative trader. It was actually the way I first became profitable. I was trading my first system I developed on the FTSE 100, and as part of that I did a very large analysis of how the market moved and the best way to protect myself and my small account.

The purpose of this post is to show you that it is better to be careful, especially until you can spot the clues the market gives on whether you are witnessing a small correction or if a move is about to turn against you significantly.

So what did I do?

I should note, even thinking about this now makes me laugh! I had to be so focused on the charts and quick in my reactions. But the key point is, quite simply, that it worked!

I would enter a trade with my standard set stop and pick the VERY closest S/R area. Now this didn’t need to be a key level or even a swing high/low. It was any S/R, even an area where the market had recently stalled by two or three candles. It could even have been the tail of a candlestick.

As soon as the market touched that level (and it was within the first 5 minute candlestick on 80% of trades) I was effectively managing my trade.

After that my rules were:

At +3 I close out if the market returns to break even.
At +5 I close out if the market ticks back to +4
At +10 I close out if the market moves back to +5
At +12 I let my profits run with stop at break even.

What did this do? Well, during a trading day, I would take a few trades with small profits, a few with small losses. I would be waiting for the larger trades to make me my profit.

And… it worked. I was in profit far more than I was in negative. It built my account. But that’s not really the important part. The important part is that it helped me build discipline. It’s difficult coming out of a trade that moves against you and leaves you -2 or -3. Your mind chirps in with ‘just wait for it to go back to break even.’ But by doing it literally hundreds of times, I became good at following rules to the letter.

Now again, I’m not suggesting you use those methods yourself. They fit in with the plan I had and worked very well for me on the FTSE 100.

What it should tell you is that

1)   You can be a safe trader whilst being a profitable trader. I much preferred taking small wins and small losses at that point in my trading, waiting patiently for the larger moves to come in.
2)   Things started going well for me when I began to follow a set of well planned rules.

Now I do a lot less screen watching and am not quite so quick on the trigger! But what I still do is follow my plan.

I hope you all have a great trading week!